CHAPTER 3 RESEARCH QUESTIONS AND METHODOLOGY
3.1. Supply Chain Model
The system mechanism of order fulfillment process in a three-tier supply chain can be described as follows: Customers come to retailer and make their purchases. Retailer sells end product to its customer and places new order with its manufacturer based on its inventory management policy and forecast on future demand to ensure continuous selling.
The manufacturer ships its end product from stock to the retailer after receiving retailer’s order, makes production decision based on its own inventory policy and forecasts on retailer’s future demand to ensure a continuous fulfillment to retailer. Then it produces end products by assembling components in stock and places order on components to its upstream supplier. After receiving the manufacturer’s order, the supplier will ship out components to the manufacturer and place order to its supplier. At the end of each cycle, every tier summaries its cost and service performances and updates information about demand and shipment for future usage. The following notation for each tier will be used in this work.
Li: supply leadtime of tier i
Qit: order quantity from tier i in period t ott: order quantity to tier i in period t
dit
^ : forecast demand of tier i in period t
^
σit : forecast demand standard deviation of tier i in period t dt: real consumer demand in period t
rit: net inventory, as on-hand inventory minus backorders, of tier i in period t yit: shipment arriving at tier i in period t
αi: target service level of tier i βit: actual fill rate of tier i in period t zi: the safety stock factor of tier i
The supply chain adopts a periodic-review order-up-to inventory system in which the inventory level is reviewed every period, if the current inventory is less than the order-up-to level, i.e. S level, the entity will place order with upper tier. We use retailer to demonstrate the periodic order process occurring in a supply chain: at the beginning of period t, the retailer receives the shipments y from its supplier and the demand t d from t the market (subscript t denotes the variable in period t). The market demand process follows a general AR(1) process without seasonality, i.e. dt =u+ρdt−1 +εt, where u >0,
<1
ρ andεt is normally-distributed
( )
0,σ2 . Then the retailer checks its inventory level r , fulfills the market demand it d , and places the order t Q to the upper tier based on its it inventory policy and forecast on future demand. The order-up-to S level is set as the itestimated mean of leadtime demand d^it⋅Li, plus a safety stock which is the product of safety factor zi, determined by the target service level that follows the equation
0 2/ , and the estimated standard deviation of leadtime demand
i
it⋅ L
σ^ . The shipment starting at period t from retailer’s supplier reaches the retailer at
the beginning of period t+Li in a one-off, not continuous, manner and there is no delay in pushing them into inventory. When the supplier cannot fulfill the order in time due to the limited capacity on production/inventory, it will backlog the order with priority of being replenished at next period. Figure 3-1 shows a three-tier supply chain and decision process at retailer.
Figure 3-1: A basic framework of supply chain and decision processes in each tier.
The other upper tiers’ behaviors in a supply chain follow almost exactly the previous description. The only difference is that they receive the order instead of the market demand from its customer. If we treat the end market as the customer, or downstream, of the retailer, all tiers’ behaviors in the chain are exactly the same as what describe above.
By summarizing tier’s inventory decision dynamic in a supply chain, Figure 3-2 concisely describes a detailed investigation of the inventory decision process at one tier in the context of supply chain dynamic and how various information sharing strategies we have reviewed in the previous section place its role in such a decision process. It is clear that a tier’s inventory (production) decision is based on five factors: customer’s order, accumulative backlog (inferring from shipments to customer and orders from customer), demand forecasting (which depends on customer’s order), arrived shipment from supplier, desired shipment in the future (inferring from orders to the supplier) and inventory policy. As orders from downstream are received, the upper tier will use this information for demand forecast and order decision. However if downstream organization shares its demand information and/or forecasting information, upper tier can use the available information to improve the forecast accuracy on market demand. In order information sharing situation, the tier assumes that the coming shipment should equal to the amount it ordered and uses order quantity it places with its supplier to forecast the future shipment from its upper tier. With shipment information available, the tier can calculate exactly the coming quantity of products in future periods and uses this information to improve its order decision and inventory management. Furthermore, if
downstream and upstream organizations could provide it with their inventory/production status, the tier could estimate the future demand/supply availability more accurately to improve its decision quality of inventory management. Note that the production decision can be easily extended in it if necessary and the only difference is that the orders come from tier’s inventory but not directly from tier’s customers.
Figure 3-2: The decision framework of one tier in a supply chain at the process level.
Solid line: information / material flow available to the tier. Dot line: available information enabled by specific ISS that can join in the decision. Rectangle: tier’s decision model. Rectangle with dot line: decision process within one tier. Arrow: the information / material flow with the arrow points to the target.
Note that the supply chain we designed in this study was a decentralized one. In concept there are two different types of supply chain: centralized and decentralized. In a centralized supply chain, a central planner (which can be one tier in a chain or a
third-party member) has access to the status of the inventories at all tiers and makes all stocking decisions for the entire chain, which has been proven by research to be an efficient way to manage a supply chain. However in practice this completely centralized control of the material flow in a supply chain is rarely feasible or desirable due to the organization barriers and information restriction among members (Lee and Billington, 1993). Therefore in practice, supply chains with multiple tiers often operates in a decentralized model, i.e. each tier manages its own inventory and makes decisions to satisfy its own performance measurements.